Recently, the Securities and Exchange Commission (SEC) adopted its final rule for implementing certain reporting requirements with respect to conflict minerals as required by § 1502 of the Dodd-Frank Act (Reporting Requirements). If a manufacturer is required to file reports with the SEC and uses gold, tin, tantalum, or tungsten (collectively, the Conflict Minerals) in its products, then that manufacturer (Affected Manufacturer) will be required to comply with the Reporting Requirements. However, even privately owned and foreign companies that supply Affected Manufacturers will be impacted by the Reporting Requirements. This is because information gathering necessary under the Reporting Requirements will be pushed down through entire supply chains so that suppliers of Affected Manufacturers will need to become familiar with the Reporting Requirements.

What are Conflict Minerals?

Conflict Minerals are minerals mined in conditions of armed conflict and human rights abuses such as forced labor in the Democratic Republic of the Congo (DRC) and adjoining countries (DRC Countries). The Conflict Minerals are passed through a variety of intermediaries before eventually being purchased by multinational electronics companies and used in the manufacture of a variety of devices, including consumer electronics, such as mobile phones, laptops and MP3 players.

Why require reporting?

The purpose of the Reporting Requirements is to provide disclosure regarding the use of Conflict Minerals originating in DRC Countries. The goal of this provision, buried in the Dodd-Frank Act, is to stop the profits from the sale of Conflict Minerals from financing the continued fighting in the DRC Countries.

The impact of the Reporting Requirements is that Affected Manufacturers will be required to file an annual report by May 31st of each year (Conflict Minerals Report) reporting on the use of Conflict Minerals in production by an Affected Manufacturer during the prior calendar year. The Reporting Requirements state that when a Conflict Mineral is “necessary to the functionality or production” of a certain product, then it must be included in an Affected Manufacturer’s Conflict Minerals Report. Producers of products that contain even trace amounts of Conflict Minerals will be Affected Manufacturers, because there are no de minimis exceptions under the Reporting Requirements. However, if a Conflict Mineral is only used as a catalyst during production and is not found in the final product, then it is not required to be reported. Further, if a tool used in production of a product contains Conflict Minerals, but the final product does not, then the Reporting Requirements are not triggered either. Finally, it should also be noted that the Reporting Requirements exclude Conflict Minerals used in products that were outside the supply chain as of January 31, 2013 from being reported.

What needs to be disclosed

Affected Manufacturers will be required to furnish their Conflict Minerals Report to the SEC as a part of a new SEC Form SD. Most Affected Manufacturers will need to file their first Conflict Minerals Report on or before May 31, 2014. The Conflict Minerals Report must include the following information:

A description of the measures taken to exercise due diligence on the source and chain of custody of the Affected Manufacturer’s Conflict Minerals, including a certified independent private sector audit of the Conflict Minerals Report.

A certification by the Affected Manufacturer that it obtained such an independent private sector audit.

A description of any of the Affected Manufacturer’s products manufactured or contracted to be manufactured, containing Conflict Minerals that are not DRC conflict free the facilities used to process those Conflict Minerals, the country of origin of those Conflict Minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity.

The audit report prepared by the independent private sector auditor, which identifies the entity that conducted the audit.

Pursuant to the Reporting Requirements, products can be considered DRC conflict free if it is determined that such products do not contain Conflict Minerals that directly or indirectly finance or benefit armed groups in the DRC Countries. Alternatively, products will not be considered DRC conflict free if it is determined that the products contain Conflict Minerals originating from DRC Countries. If an Affected Manufacturer cannot determine the source of the Conflict Minerals used in its products, then the Affected Manufacturer must disclose its inability to determine the source of the Conflict Minerals and its products cannot be labeled DRC Conflict free.

Given the significant burdens the Reporting Requirements impose on Affected Manufacturers, it is critical that companies begin to perform meaningful due diligence with respect to Conflict Minerals in preparation for any required disclosure they may need to provide as a part of a Conflict Minerals Report to the SEC or even as a supplier to an Affected Manufacturer. The electronics, communications, aerospace, automotive, jewelry, and industrial manufacturing industries, in particular, are impacted due to the necessity of Conflict Minerals in their products.

McDonald Hopkins’ experienced professionals understand the complexities in this area of law and have the skill to provide you with the guidance and solutions you need.